Cognex Corp (CGNX) Q3 2026 Earnings Call Transcript

Now expect revenue of 1.14 to 1.16 billion dollars. This increase to previous expectations is driven by stronger growth in logistics, representing approximately 16% growth at the midpoint, or 17% growth excluding the 2025 commercial partnership benefit. We expect adjusted EBITDA margin of 31 to 32%. This is the midpoint representing approximately 1,000 basis points, year-over-year expansion, or approximately 1,080 basis points, excluding the commercial partnership benefits. Our increased fully adjusted EBITDA margin outlook reflects our ability to deliver stronger than expected revenue growth while delivering on our cost reduction commitment. We remain on track to achieve approximately 35 million dollars of annualized net cost reduction, normalized for incentive compensation while continuing to invest for growth. These actions, together with an optimized pricing playbook, have significantly improved the earnings power of the business. At the midpoint of our guidance, we expect approximately 93% flow-through of incremental revenue to adjusted EBITDA, compared with roughly 70% in 2025. Adjusted earnings per share is expected to be between $1.68 and $1.72, with the midpoint representing approximately 67% year-over-year growth or 75% growth, excluding the commercial partnership benefit. I would also note that our full-year adjusted EPS outlook now includes approximately $0.08 per share of investment income, down from the prior expectation of approximately $0.11 per share. Reflecting the liquidation of financial investments to partially fund the RealSense transaction, which we continue to expect to close in the fourth quarter. Before concluding, I'd like to briefly highlight two baseline revenue items that affect year-over-year comparisons but do not reflect changes in underlying demand. As shown on page 10, the first relates to the divestiture of our Japan-focused trading business and other non-core product exits, reducing revenue by approximately $5 million per quarter, beginning in the second quarter. The second is the $13 million one-time commercial partnership benefit recognized in the third quarter of 2025. Taken together, these items create roughly $30 million of revenue headwinds in 2026. Even after those impacts, we expect to deliver strong double-digit revenue growth, more than 1,000 basis points of adjusted EBITDA margin expansion, and greater than 70% adjusted EPS growth this year. In summary, Q3 demonstrated the strength of our execution, its record revenue, profitability above our expectations, resulting in record-adjusted EPS, and strong cash generation. We remain focused on delivering our fourth quarter commitments and finishing 2026 with continued momentum. We are also pleased to announce that we plan to host an investor day in June 2027. The event will provide an opportunity to review our progress, discuss our long-term strategy and growth opportunities, introduce RealSense, and hear directly from members of our broader leadership team. Now, Matt and I are ready for your questions. Operator, please go ahead.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you limit yourself to one question and one follow-up. Again, that is star 1 to register a question at this time. Today's first question is coming from Tomo Sano of J.P. Morgan. Please go ahead.

Tomo Sano of J.P. Morgan. Hi. Good morning, everyone. Congrats on the caller. Tomo Sano of J.P. Morgan. Thanks, Tomo. Good morning. The first question for Q4, how much of the expected revenue grows, which is 11 percent, Excluded in real-age sense coming from... Factory automations, end markets, and logistics, and anything that you see more strength from the demand from any verticals would be appreciated. Thank you.

Yeah, sure. Thanks, Tom. I'll have Dennis comment specifically on Q4. Maybe I'll start a little more broadly, which is what are we seeing across the business now, I think. You know, we think of the business in a few different ways. One, where are we in the industrial cycle? And quite clearly, based on various indicators, you know, we're well into a growth cycle that seems to be accelerating, which is really encouraging. At the same time, we're seeing demand arrive in quite a diverse way across geographies and markets and customers. That demand is really supported by some secular tailwinds, I'd say, around investment in AI, how AI technology is driving perhaps more ambitious investment in automation in various sectors. And then, you know, the continued trends around labor shortage, increasing, you know, direct material costs, labor costs, and other things that are really pushing customers really in all industries to focus on automation and specifically machine vision as a way to drive their businesses forward. And so, you know, on top of it... I think as a business, we're executing really quite well. Our commercial engine is performing well. A lot of the changes we made over the last year and a half are paying dividends. Our product innovation engine is executing well. A lot of the new products we've introduced over the last several years are being very well received. The work we did to rationalize the portfolio and really focus ourselves, the work we did to really right-size the cost basis and focus on productivity, all things are really coming together. So I think we're carrying great momentum into the fourth quarter, frankly, into next year, and very pleased with what we're seeing. Dennis, maybe you want to comment on Q4? Sure.

Let's talk maybe Q4 starting on the top lines, on the year-over-year comparison to your questions. I think the growth is really strongly coming from the factory automation and markets, especially if you think across packaging, semi. Also on the electronics, even though it's a seasonally low quarter, of course, in Q4, but we see also there year-over-year growth that's driven by these end markets. Sequentially, I would say a step down from Q3 to Q4 is in line with our normal seasonality. Now, in a year with strong electronics roads, you would expect a bit of a higher step down from Q3 into Q4. There's also maybe a couple of other smaller effects which drive the sequential step down, logistics, a slight step down there. There are less days in the quarter, you know, small effects there, a couple of days less versus Q3, probably more significantly more or less days in the year-over-year comparison there. So there are a couple of these effects which drive the sequential step-downs. In that regard, I would really encourage to what Matt just said to look at the broader macro backdrop when you think about, like, how is the business performance? And we think like overall, it's going that we got a pretty, pretty positive macro backdrop. Now, a few other items on Q4, maybe going further down in the P&L, right, I talked about in the prepared remarks. Remarks, slightly higher commissions, sales commissions, driven by the higher revenues or OPEX sequentially slightly up compared to Q3. Cross margins probably a little bit lower, really slightly less lower than Q3, right, related to the seasonality effect of electronics here, so probably pretty much within the expected range, and that still enables us to show very strong flow through to the bottom line, so also somewhere in the range of 100% revenue flow through year over year. And then, yeah, we started to factor in the RealSense acquisition from the cash outflow perspective, not really from an... P&L perspective, like on the revenue line and so on. But we factored in lower investment incomes and that we got adjusted EPS. It's perhaps not moving as much as maybe the revenue and the margins compared to prior guide, but it's really due to the offset of the lower investment income, which we have now factored in into Q4. And, yeah, maybe while I just talk about kind of some of these modeling effects, maybe I want to highlight one item in Q1, which we have been highlighting in prior years as well, that Q1 typically has higher stock-based comps. In that regard, when you think about your OPEX modeling for next year, consider these higher stock-based comms in Q1, kind of seasonal effects, and then certainly that in this year, in 26, we had some favorability for the retirement of the prior CEOs. In that regard, we would expect about 6 million year-over-year increase of stock-based comms into the first quarter.

Thank you, Dennis, Matt. I appreciate the details. I'll leave you there. Thank you.

Thank you. The next question is coming from Andrew Buscaglia of BNP Paribas. Please go ahead.

Hey, good morning, everyone.

Hey, Andrew. Good morning. Morning.

So I just, you know, as we kind of finish up 2026 here, I'm curious, you know, a lot of investors, you know, look at Cognex as sort of a very highly cyclical, obviously, especially on the top line. And in certain end markets that you're in, like consumer electronics, tend to have- Challenges, you know, growing over a multi-year period. Similarly, in semis, like very cyclical new market you guys are talking about. Can you give us some comfort or some idea of how you see those two markets playing out into 27? And do you expect declines over the full year?

Yeah, thanks, Andrew. I think it is fair to say that maybe over the last 10 years, when the business has cycled up, it's really been driven by a few things, specific changes in technology, specific outsized investment years in certain end markets. I think what's different today is really how broad-based our growth has become. You know, as a business and as a leadership team, we've really put a big emphasis on how do we diversify the growth engine of the company, and I think we're well on our way there, and I think you're starting to see that in the numbers, right? So as much as I will give you my view on electronics and semi, you know, we're seeing really strong demand across really almost all of our end markets, with maybe the exception of automotive, but it's really automotive Europe that is really the laggard at this point. And so our focus and our strategy right now is really one of diversification. I think we're well on our way there. And again, primarily to mitigate the cyclical effects of the past. And so, and then, you know, meanwhile, I think there's a reason to view maybe this cycle as potentially more durable, right? And that has to do with some of the outsized investments that are happening in automation. Again, not just semis, but really using automation more ambitiously to mitigate the effects of direct material cost increases, labor shortages, diversifying your supply chain in light of geopolitics. So, I think we view this cycle as potentially different than previous cycles in that way, coupled with, frankly, very strong execution in the business. Now, let's jump into semis. You know, again, I just remind the group, it is our smallest end market, roughly 10% of revenue on a 2025 basis. Still a very attractive market for us, really, really the legacy of Cognix, you know, comes from advanced semi-manufacturing. We have great customer relationships with leading OEMs. You know, we continue to innovate in this space with products like the 1750. And what are we hearing from customers? Really strong, robust demand, right? Demand across various chip types, not just memory, but active components, core processors, and really extending multi-year potentially. And so I think, you know, even if you think about the semi-cycle, potentially more durable, potentially different than previous semi-cycles in terms of length, potentially. And, you know, a lot of investment we've made there organically and inorganically, I'd cite even, you know, the acquisition of Moratex in 2023, you know, very much strengthened our play into semis. So, so continue to be optimistic there in electronics, right? Six, six consecutive quarters of double digit growth. What's behind that? Well, obviously, you know, on one hand, we've worked really hard to diversify that portion of our business outside of one customer to many more customers. The same time, we've seen new entrants to, you know, embodying AI tools and hardware, consumer hardware, and you can imagine that we'd participate in that manufacturing. You know, we've driven an aggressive technology strategy to solve new problems using AI, driving penetration of vision into electronics. And then last but certainly not least. You know, the brand owners here are diversifying their supply chains from, you know, largely China today to other Asia and potentially even outside of Asia. And so, you know, looking to a partner like Cognex to help them do that. And then on top of that, obviously, the investments in AI infrastructure. So needless to say, I think we also see the electronics growth cycle as strong and potentially more durable than in the past. So, again, I'd encourage you not to hone in on any one market or any one trend that's driving the business today. It is quite broad-based, and really, that's our mandate as a leadership team, which is to continue to diversify the growth engine, and I think you're seeing that in the numbers now.

Yeah, that's very helpful. Maybe like on the margin side, I think, you know, kind of a similar question, but you guys kind of talk about being more like aware of the cycle. And maybe given where you think you are in the cycle, how do you manage margins to continue to expand them from here? Or is there another phase you're entering in terms of kind of a margin step up here?

Yeah, Andrew, first of all, extremely pleased about the progress that you have been making this year, right? So if you recall, we went into this year with the expectation to finish the year at a 25% adjusted EBITDA margin run rate, and we have significantly accelerated our margin expansion throughout the year with this combination of strong top-line growth while still staying extremely disciplined on the OPEC side and actually achieving OPEC's reduction in line of strong top-line growth. And certainly at support from improved mix into the business, but certainly also the ability to drive pricing and offset some of the memory costs. So that was really kind of the key ingredients for the 2026 margin expansion. And I think first and foremost, I think the most important statement in my mind is that we are not at the end of our margin expansion story. There's still clearly more opportunity for us. And also here there are several factors. So, first of all, leverage through top-line growth. I think we have been talking about it before that the macroeconomic backdrop remains favorable for us and the diversification of the growth is happening and we see it unfolding. In that regard, clearly looking forward into more top-line growth, which can drive further leverage. And then at the same time, we have been saying also that while we do not see kind of the focus for further cost reductions, but clearly the shift to productivity and what does this really mean? Maybe in a simple statement, it is like grow the top line with existing resources. And that means like drive OPEX growth next year on an inflationary level, I would say. And that would include that increase in the stock-based comp. And that basically, again, sets us up for higher leverage in that regard. Clearly, there's more room to grow on the margins. And I think in terms of kind of concrete, what that would mean in the numbers, I would say I would point to the next earnings call, right? So we want to really get through this year to focus on our commitments for this year, but then we'll talk more about concrete numbers in the next earnings calls, and then we'll have the investor day in June where we'll talk more about the details, about the mechanics and how the walks and so on will look like, but clearly a margin expansion opportunity is still there.

Thank you.

Thank you. The next question is coming from Pradapsing of UBS. Please go ahead.

Good morning. Thank you for taking my question. Good morning. I wanted to ask an auto because you did see an improvement to mid-singalism growth in the quarter. So, how much of that reflects easier comp versus an improvement in the underlying demand? And you also mentioned improvement in North America. Where are you seeing the evidence of customer investment beginning to recover in that vertical?

Yeah, thanks for the question. I mean, we're definitely in a better position following two years of quite significant declines. I think we said we see our automotive business globally stabilizing, but I think you're right to point out geographic differences in the Americas. I'd say growth has actually returned quite strongly. Asia to a lesser extent, but still a grower. It's really in Europe, where we're seeing a lot of those OEMs struggle to perhaps manage through what they're seeing as an increased competitive environment, but also digest some of the bigger investments they made in EV. But we're optimistic that they are and will return to investment mode, and in some cases, they already have. So, yeah, I think the business, our business in auto has stabilized, has returned to growth in the Americas in Asia. You know, how do I think about it more structurally? I think it's just a great, great automation market, right? The cost of quality is very, poor quality is very high, right? It's an industry that is facing, you know, shortages in skilled labor and increasing direct material costs and rising tariffs and having to diversify their own manufacturing bases, potentially produce more regionally. All of that drives demand for automation and specifically machine vision as a key component. And so what are we hearing from our customers? Really a heightened engagement in our technology and how we can help them solve the challenges that they face, whether it be quality or cost. And so, yeah, I think where are we? We've stabilized the business. We're really focused on how do we return to growth even more strongly heading into next year and return to growth in all of our geographies, and I'm fairly confident that we will.

Great. Thank you. And just as a follow-up, Nick, on logistics, you've raised full-year outlook, so clearly the business is tracking ahead of various heart rate. How broad-based is this current strength across large accounts versus smaller customers? And when you look at the pipeline, what are you seeing in terms of greenfield projects? And just as a summary, after so many quarters of strong growth, can you give your views on the runway for further growth over the next few years in this business?

Yeah, sure. Yeah, happy to. Yeah, very pleased with the performance and logistics. Our largest market is a percent of revenue. Our 11th quarter of double-digit growth, impressive, frankly, by any measure. And customer concentration, right, we do have one large customer that is growing strongly, but I'd say our growth is broader than that customer. And there's really three components to our growth strategy in logistics. One is driving the adoption of vision inspection in a market that historically hasn't adopted for various reasons, and we see our leadership in AI as a key component to that. Roughly a year ago, we launched a new product in logistics called the SLX, which is really bringing AI vision to warehouse automation. Very good traction there. So vision is a bit of a white space that we think has a lot of potential. You mentioned greenfields. We are seeing good activity there. We do have good visibility. We engage with all of the leading operators of warehouses around the world, and we're seeing good activity there. But where are we seeing, and also focused, is really driving productivity within existing facilities. And over the last several years, I think that has really been an area of focus and continues to drive growth for us. What does that mean practically? It's really working with customers to see how do they get more throughput, how do they lower their unit costs, how do they improve quality, reduce manual touches as an item travels. Through the network. And so whether that's improving traceability by bringing our leading barcode rating technology or improving processes by bringing visual inspection to the table. And so really those three components, vision, productivity improvement in existing facilities, as well as riding the wave of new capacity through greenfields. Now, how long can it last? Hard to say. I mean, anytime you've been growing at this rate for that long, right, we start to face very challenging comps. You know, our customers have to digest some of the technology that we've delivered to them. And so, you know, in the near term, could growth moderate? Could it become a bit more lumpy? Certainly could. Over the medium term and longer term, though, we're very optimistic about logistics as a market. It has all the ingredients to continue to invest in ambitious automation plans. We're seeing that with some of the leading retailers really making big investments in automation. So near term, tough comps potentially could moderate, potentially lumpy. Medium, long term, very optimistic on this being a leading growth engine for the company. Thank you.

Thank you. The next question is coming from Tommy Moll of Stevens. Please go ahead.

Good morning, and thank you for taking my questions. Hey, Tommy. Hey, Tommy. Dennis, you characterized your fourth quarter sales outlook as in line with seasonality if we take out the electronics impact. I think you're down about 11% at the midpoint. Is there anything you can do to bridge us? On that to whatever you would consider normal and maybe quantify the electronics impact.

Yeah, I mean, I would say, again, like electronics, very strong growth this year, right? I think Matt talked about the various factors there, so I'm extremely pleased. But you know that electronics has a strong seasonality into Q2 and into Q3, so there is this step down into Q4 happenings. In that regard, in a growth year like this, you will have that step down, and I think historically you have seen typically like high single digits, right? So that means like, if you say like, hey, bridge me, then I would say like bridge from high single digits to 11%, so it means like we need to bridge 2 to 3%, so I think I said early on the call, a slight sequential step down on logistics as well, Slide a less number of days, essentially, right? So that's maybe 3% less days if you want to put that into a number. In that regard, there are these smaller other effects, which may be kind of bridged between what you have seen if you go back for maybe over the last decades in terms of the seasonal step down. But again, I would like to bring it actually back to the broader macroeconomic picture and the backdrop of the business with strong PMIs with four or five end markets performing at double digit levels. And in that regard, I would say, like, look at the bigger picture and I think we feel positive about what we see there.

Thank you, Dennis. Wanted to follow up with an update on new customer ads and the state of the channel. These are two themes you highlighted specifically last quarter, but haven't been touched on today, so I'd appreciate anything you can offer.

Yeah, thanks. Thanks, Tommy. Absolutely. So I would say the new customer acquisition engine of the company is roaring. We continue to acquire new customers at a similar rate as we have in the past. And that's great. A lot of it is, you know, a testament to the quality of the technology and products we're releasing. A lot of it has to do with the changes we made to our go-to-market earlier last year. And so, you know, I think that's going very well. Now, we have shifted a little bit to what we, I think, mentioned in the last call, land and expand, right? Land really being acquire new customers, going very well. And expand is how do we drive a greater level of penetration, right? And so there, what we're doing is every time we acquire new customers, really get a keen view on their account potential as it relates to machine vision. You know, orient our selling activity to make sure that as much as we want to acquire the next new customer, make sure that when we acquire a customer with high potential, we also make sure we take care and grow our share there as well. And so it's very much transitioning from a land only to a land and expand growth strategy. And so very pleased with how that's been going. Won't give you exact customer acquisition numbers, but only to say we are in line with historical trends.

Thank you. I'll turn it back.

Thank you. The next question is coming from Guy Hardwick of Barclays. Please go ahead.

Hi, good morning. I'm just wondering about the prospects for gross margins and logistics, given you mentioned the SLX products. And I guess mix is the biggest, is a huge driver there. Is there a prospect of the gap between factory automation and logistics gross margins, is there a prospect for that gap to narrow over time, and what would be the key drivers to that happening or not happening?

Yeah, thanks for the question, Guy. Absolutely. So, as we've said in the past, logistics relative to factor automation is a lower gross margin business. A lot of it has to do with it's more project-based, meaning we deliver a complete kit of material, including Cognix Vision Systems and other material that we pass through the P&L, as well as services, installation services, commissioning services, which is notably different than how do we go to market in factor automation. So that is true. But absolutely focused on how do we close that gap, right? Vision adoption and vision penetration is a key piece to that. You would imagine, and I think we've talked in the past that when we sell a vision system to a warehouse operator, generally spoken at much higher ASPs than our barcode rating portfolio. Why? Because that vision system, frankly, is delivering a higher ROI. It's doing a more sophisticated task. So as vision adoption grows, and it is, we would expect gross margins to improve. And then, you know, we are continually finding ways to use technology to make the deployment and maintenance of our logistics-oriented systems easier, simpler, potentially even performed by the customer or by, you know, a partner to get that off the books, if you will, and making very good progress there. You know, improving the workflow, the setup, using AI to automate configurations, very encouraged by the work we're doing there to make sure that perhaps what took, you know, several days of commissioning maybe takes one day, maybe even a few hours. And so, you know, that reduces the amount of margin dilutive activity when it comes to delivering a logistics product. So I'd point to really those two things, growing share of vision and driving a continued focus on ease of use as a way to improve gross margins and logistics.

And maybe let me add to that, I think maybe for the last 12 months. While not providing specifics, I would say like I've seen gross margins to trend favorable within logistics and want to point towards the portfolio optimization, which we announced at the beginning of the year. Well, the major effect of that was within packaging. There was also some activities done within the logistics and market, and that drove a favorable mix within logistics in that regard and really actively working to drive gross margin optimization in that specific end market. I'm quite pleased with what we have seen as a result.

Thank you. Just a quick follow-up. Are you seeing any signs of greenfields picking up in logistics?

I wouldn't say that guy. Yeah, I'd say it's a – yeah, no, I wouldn't say picking up. And again, our business is really quite well balanced in terms of where growth is coming from. Greenfield is certainly a component of it, not the majority. I'd say the majority at the moment is probably still focused on productivity, landing new technology in existing facilities, and so – as well as driving new applications with vision. So I wouldn't say we're seeing it accelerate. It is a key component of growth, but not the majority at the moment. Okay, thank you.

Thank you. The next question is coming from Robert Jamison of Needham & Company. Please go ahead.

Hey, good morning. So just on some of the ambitious automation spin that you're seeing, just curious how that translates to a RealSense thesis. You know, it sounds like the core growth for that business isn't really predicated on some of the emerging areas within robotics like humanoids, but, you know, to what extent do you think this could provide like a more material like upside growth driver for RealSense as that rolls into the portfolio?

Yeah, thanks for the question. I mean, certainly should. Again, I would just remind the group, you know, we're not yet closed, and so our focus there is really getting to close and managing to the first quarter or two's worth of integration activities. You know what, again, why RealSense, right? It really came down to an attractive adjacent market, and I think you're pointing to more advanced robotic types, humanoids, quadrupeds, other things. You know, frankly, where we're very focused is maybe some of the more established type of robotic applications that they serve extremely well today, or traditional fixed arm types, where historically vision attachment to a fixed arm robot is still very, very low, and so we see a penetration opportunity there in a very well-adopted type of robotic automation. And then AMRs and AGVs, again, a pretty well-established, well-adopted form of automation that both of which we see directly surrounding a lot of the vision inspection stations that we serve today. And so, you know, that's really where our focus will be. The robust automation investments that I mentioned earlier very much would apply to those style of robotics. And so, yeah, I think to answer your question simply, I think it would. To the extent we see automation investment driving our core business at Cognex very much would apply to investments that would be going to the robotic systems that would pull through RealSense.

Thank you for that. And then just on the new insight, 1740, just given its like drop-in upgrade nature, like to what extent do you think that kind of shortens some of the typical semiconductor qualifications that you might need to go through? And, you know, is there any early feedback points that you can give us just regarding setup times and the use of like the AI autotune feature?

Yeah, absolutely. Thanks for the question. Yeah, we spent a lot of time making sure that the upgrade path from the 1740, which is an incredibly successful product in terms of its adoption and penetration, could be as seamless as possible to 1750. You know, things like making sure software commands are identical, form factors are identical, optical performance, you know, quite literally down to how the LEDs project light as close as they could be so that you could take one out, plug in the other, load it, you know, fully job compatible. So you take the configuration job file from one, you drop it on the other, it just kind of boots up and works. And so a lot of time was spent there because we know that our customers demand that, right? You know, they're particularly in a heightened demand environment, like they face today, they don't want to spend engineering qualifying new technology that already works for them. They want to spend their time designing the next machine to keep up with the next processing node, right? And so that's great, very well received. You can expect that, you know, ahead of the product launch, we would have consulted with our leading customers in this area to make sure that they were satisfied. And I think the early indications are they are. At the same time, we took the opportunity to really significantly upgrade the technology in the product, right? Our 1740 series has been in market for over 10 years. Extremely a good product, but time for an upgrade, you know, pre-AI. So we brought AI, edge AI vision inspection, sorry, vision tools in terms of reading very complex alphanumeric marks that we saw as emerging. We took the time to invest in auto-tune. What is that? You press a button, the system takes a minute to cycle through different lighting and other sort of filtering schemes. It proposes what it thinks is the best to the user. The user clicks on it, and off you go. So really great ease of use. We upgraded the workflow. It's a fully web-based user experience, but again, in a way that is fully backwards compatible. So, yeah, pretty optimistic that we can move aggressively in terms of adoption. Early indications are that we will. I'm starting out, so thank you.

Thank you. The next question is coming from Joseph Giordano of TD Cowan. Please go ahead.

Hi, good morning. This is Chris Grenga on for JO. When you provided the early fourth quarter indication last quarter, did you expect the official midpoint would ultimately be only about 10 million higher?

I mean, when we provided the guidance, we We took what we saw at that time and basically looked at general, like, you know, typical indicators of funnel and much less so backlog and, you know, when we are quarter later, we have a little bit more visibility into that fourth quarter and then we update based on what we see. So in that regard, I wouldn't say like there's any direct connection between thinking about like what was the prior midpoint to the current midpoint. It's really about like what we see in the business. And as I outlined before, I think especially on the bigger macro backdrop and performance across the four strong end markets, I think we see a lot of strength. And then I think maybe another item I would like to highlight is that you see a really strong supply chain execution as well. So it means like in a maybe general market, which has tightened supply, we have been really able to maintain our service level agreements of next day shipments and in general feel good about our supply chain. Of course, there are always risks in supply chain, but in general, we feel good about it. So in that regard, I would say feeling good about being able to deliver on that revenue also from a supply chain perspective in the fourth quarter.

Got it. Thank you. And you described the cycle as broader and potentially more durable than historically. Could you provide any early framework for 2027 organic growth?

Yeah, Joe, no, at this point, we won't. No concrete growth projections for next year. Our focus is executing the remainder of 2026 and hitting what should be a very nice growth outcome. You know, but again, I would say, what's the momentum? What's the sentiment? What are we seeing? Just to reiterate what we've already said, we're in the middle of a strong cyclical recovery of manufacturing investment supported by several structural growth drivers that potentially make that cycle stronger and longer heading into next year. And then on top of it, as a business, we feel like we are executing exceptionally well in terms of how we manage our costs, how we make sure we focus our portfolio, obviously drive game-changing technology around advances in AI, and then make sure that we continue to tune up the commercial engine of the company. So, I think if you put those three things together, right, momentum building in terms of the industrial cycle, potentially stronger underpinnings that make it a different cycle, longer and more durable, and a business that's executing well, I think we all should be very optimistic. We certainly are about the momentum that we're carrying into next year, but not yet ready to give specific guidance.

Thank you very much.

Thank you. The next question is coming from Piyush Abassi of Citi. Please go ahead.

Good morning, guys. Thanks for taking the questions. Maybe Matt is following up on the last question. You want to wait for another quarter to comment on the margin expansion potential next year, but Dennis, I think you did make a comment on incrementals in that 60 to 90% range in 27. Again, you are expected to finish 26 very strong, but as we start thinking of 27, do you think that some form of that framework can still hold?

Yeah, Pios, definitely. I mean, see, I think I mentioned it earlier on the call. I think a strong macro backdrop with a little thing for growth in 27 and combined with continuous discipline around OPEC should drive leverage effect, right? So that means you may not see the 100% revenue flow through us. We have seen it this year, right? So maybe it's maybe around the 60% or so, I would say. I wouldn't put it as high as 90%. But kind of as an indicator, I would say, in that regard, clearly, I think there is margin expansion opportunity and we're having our eyes focused on it and we'll keep on driving it. And then, yeah, again, want to point to on the Q4 earnings calls, we'll provide a bit more update on the broader financial framework and then we'll have Investor Day next year where we'll talk more about the mechanics behind it.

Hi, that's helpful. And one on like RealSense, like I understand it hasn't closed yet, but are you hearing from your customers on like what RealSense can do for them? Any early engagement as a combined portfolio that you can or want to highlight?

Yeah, Pius, I'd say it's a little early for that. You know, again, I think we're focused on the close. We're focused on the early days of the integration. You know, of course, customers that are already using RealSense technology are giving us very positive feedback, right? And we're learning more about the applications that they're being deployed against and learning more about the customers and how they, you know, adopt the technology. But the indicators are as they were when we set our sights on this as an opportunity and continue to be very excited to work together with the RealSense team and continuing to get very positive feedback from the market, I would say.

I appreciate all the color, guys, and good luck, and looking forward to being blessed today.

Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Hi, good morning. This is Ken for Joe. Thank you for attending our questions.

Thank you, Ken.

First on China, given the strong growth in China this year, so where are you seeing the most traction from your localization initiatives outside of semiconductor and consumer electronics, and how sustainable is the growth there?

Yeah, thanks. Thanks for the question. I'm very pleased with the performance we're seeing out of our China business at the moment. Growth rates we haven't seen, frankly, for years. And, you know, as we've said over the last 18 months, you know, we've really focused on our strategy in China. We've made good investments in our commercial organization. We've landed distribution in country. We have local manufacturing, and we've really broadened the number of technology partnerships we have to leverage, frankly, the speed, quality, And in innovation that we see domestically in China. And so all those things are playing to our advantage. You know, and, you know, it's really across product types, I would say, but certainly concentrated in the semiconductor and electronics and markets. I mean, that's very much where we're seeing the majority of activity in China. And, you know, our customers, you know, are leading machine builders and OEMs to a lesser extent and users who, you know, work with Cognex first and foremost because of our leading technology. Excellent, I would say, service levels, service levels in terms of, you know, applications, engineering, delivery, and last but certainly not least, global support, right? A lot of our customers in China have ambitions to extend their businesses outside of China and see Cognex as a key enabler to that, obviously with the strength of our technology, but also the strength of our global presence from a service and support standpoint. So I don't think it's any one thing. I think it's a variety of areas that we've really focused on over the last 18 to 24 months that are playing to our advantage and very pleased to see that arrive in very strong growth from our China business.

That's helpful. Thank you. My second question is on capital allocation. So following the RealSense announcement, how are you thinking about the M&A opportunities that, like, both in terms of areas of focus and market activity, and how are you prioritizing share repurchases for the acquisitions and investments in organic growth?

Okay, maybe let me start on the capital allocation side first, right? So, in general, very strong net cash position, close to $850 million prior to acquisition, which means also after the acquisition, have strong net cash. I think our immediate focus is probably more on adjusting the real sense acquisitions. It's not definitely a priority to say, like, you have to deploy more capital in the near term. But of course, as we typically do, I would say, when the dust settles after the earnings, we'll consider what we do in the more nearer term. So we'll keep that under review for sure. But then longer term, clearly, I think M&A stays part of our capital allocation strategy. And I think we clearly see more opportunities in terms of where we could strengthen the diversification of our growth. In that regard, clearly M&A remains a part, but of course it always comes back to finding the right target at the right valuation and that it can meet our financial frameworks. In that regard, as we said when we first came out with the M&A Council Allocation Framework, you said like it could take one, two or three years to find the next target, so that still applies today. In that regard, we'll take it as the right targets will emerge.

Great. Thanks for the color.

Thank you. Unfortunately, that brings us to the end of time we have today for questions and answers. I would like to turn the floor back over to Mr. Moschner for closing comments.

Great. Thanks for joining us this morning, everyone, and for your continued support of Cognex. We look forward to updating you on our progress in the fourth quarter.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.